What is Making Tax Digital

What is Making Tax Digital

Making Tax Digital is the new initiative launched by HM Revenue & Customs to modernise the tax system administration and reduce the amount of tax lost due to human error and inaccuracies.

This mandatory requirement will apply from April 2019 but will initially only cover VAT return submissions by VAT registered businesses with a turnover exceeding £85,000 per year. Beyond that it will also involve corporation tax and self assessment, but this will not be until at least 2020.

As the title suggests, to be compliant businesses are required to keep digital records and ensure tax data is submitted through the new HMRC API (application programming interface). The phrase "digital records" means compatible software or, if using spreadsheets, use of intermediary bridging software.

Of course, this will mean a significant change for many business, especially those that still rely on manual records as these will obviously not be compliant. Special consideration needs to be given to the most suitable solution depending on your business but this could be the ideal opportunity to take your systems and processes to a whole new level. Technology in general has come on leaps and bounds in recent years and the bookkeeping/accounting industry is no different. Today's bookkeeping software systems boast a wide range of time saving functions that help with improved credit control, business performance visibility and an overall better customer experience to name but a few. Also, with the immergence of the "cloud", these systems mean data can be accessed anywhere so there is much more flexibility when it comes to knowing your business. So all in all, this could actually be a blessing in disguise!

In the early days following the announcement of MTD, it was widely believed that only full accounting software would be compatible. However, HMRC have recently confirmed that spreadsheets can be used but with a stipulation that there must be "digital links" between them and other systems (although they are allowing a 12 month soft landing for these to be in place). These digital links essentially mean that once data is initially captured in the digital records, any further transfer, recapture or modification must be done without the use of manual re-keying or cut and pasting. The bridging software previously mentioned is what is then be used to submit all the relevant information to HMRC in the required format although this software needs to be sourced independently as HMRC do not provide it for you.

HMRC are currently running a pilot program for MTD and they are openly encouraging businesses to join as it allows them to properly test their new systems as well as getting businesses familiar with the new rules and processes as early as possible. If you want to join this pilot, you need to register with them first but also make sure you have a plan in place to be able to submit your VAT return in the required format.

There are some exemptions to mandatory registration as follows:

Religious grounds where beliefs are not compatible with the use of electronic communications

Where an insolvency act is applied

Where it is not practicable to use an electronic return system for reasons of age, disability or remoteness of location